Credit-Rating Agencies Still Plagued By Incompetency, SEC Reports

The credit-rating agencies are like a miserable long-term relationship: You desperately want to end it, but can't imagine life without it.

The latest reminder of our dysfunctional entanglement with the rating agencies comes from the Securities and Exchange Commission, which on Thursday issued a 26-page report concluding that the rating agencies are, and I'm paraphrasing a bit here, still useless.

The SEC, in a second annual report on the agencies, found they had not fixed many of the problems the SEC noted in its first annual report a year ago. As Jeannette Neumann of the Wall Street Journal points out, the agencies frequently don't follow their own standards when rating debt and struggle to keep tabs on analysts and document their work. These are the same problems the SEC observed a year ago, Neumann notes. But the SEC did give the agencies an "E" for "Effort," saying they had taken some steps toward improvement.

Whatever steps the agencies have taken, they are probably not enough. They have not been substantially reformed since the days when they assisted in the destruction of the financial system by sloppily assigning "AAA" ratings to whatever supbrime-garbage casseroles Wall Street cooked up for sale to the public.

For one thing, the agencies still get paid by the issuers, not by investors, meaning they will always be under pressure to give high ratings to whatever Wall Street is trying to sell.

"Both firms received substantive information about MF Global's financial health and discounted its significance or altogether failed to identify or understand it," the subcommittee wrote.

"Given the significant and market-wide impact of credit ratings, investors expect Moody's
and S&P to perform a careful and searching inquiry into the companies they rate," the committee added. "Their failure to do so in the case of MF Global raises questions about the role that credit rating agencies should play in financial markets."

If those questions sound familiar, it's because we've been asking them constantly in the years since the financial crisis. Why are we still putting up with these agencies, after all the trouble they have caused us?

The answer is that there's no easy way out of this relationship: We long ago moved into the same apartment. Mixed up all of our books and dishes and furniture. Bought a dog together.

The agencies' influence is still felt throughout the financial system, with governments and investors all over the world relying on their analysis, however suspect, when making decisions about where to put their money.

For some reason, though, nobody has yet been willing to take the painful steps necessary to end this sick relationship. Credit-analyzin' is hard! It's just much easier to outsource the work to somebody else, even if they do occasionally goof up in earth-shattering ways. Meanwhile, the First Amendment has so far protected the agencies from getting successfully sued for their opinions, as S&P recently was in a potentially groundbreaking case in Australia.

Until this attitude changes fundamentally, we can expect to suffer still more subprime-CDO blowups and MF Globals.